IRS Issues Final Regulations on Qualified Improvement Property
The IRS issued final regulations (T.D. 9956) addressing the calculation of qualified business asset investment (“QBAI”) when qualified improvement property (“QIP”) is depreciated under the alternative depreciation system (“ADS”). QBAI is used to determine the tax on foreign derived intangible income (“FDII”) of IRC section 250 and the tax on global intangible low-taxed income (GILTI) of IRC section 951A. The regulations were published in the Federal Register on September 24, 2021, and are effective as of that date.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, included a technical correction for IRC section 168 to classify QIP as 15-year life property under the general depreciation system, including eligibility for bonus depreciation, and 20-year life property under ADS. The final regulations permit taxpayers to employ the QIP classifications for property placed in service on or after January 1, 2018, as if the 15-year and 20-year life classifications had always been in place as part of the Tax Cuts and Jobs Act of 2017.
T.D. 9956 also makes final the proposed regulations from November 2020 regarding net operating loss (“NOL”) carrybacks to pre-2018 tax years. Remember that the CARES Act temporarily extends the NOL carryback period for up to five years. NOLs may be carried back to as early as 2013 providing much needed cash flow from refunds of taxes paid during more profitable years in the past. In some cases, a rate arbitrage from higher tax rates paid in earlier tax years can provide even more benefit of NOLs carried back.
With final regulations now in place for QIP property and NOL carrybacks, taxpayers will certainly want to “scrub” their tax-fixed assets records for QIP reclassification opportunities – especially since those additional deductions may be carried back up to five years. At the same time, taxpayers can search for capitalized costs versus deductible repair expenses, partial and full asset dispositions, and class life accelerations, all of which can enhance the tax depreciation “catch-up” deduction leading to beneficial tax outcomes.